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Final Demand for Structured Finance Securities

Author

Listed:
  • Craig B. Merrill

    (Wharton Financial Institutions Center, University Of Pennsylvania, Philadelphia, Pennsylvania 19104; Mariott School, Brigham Young University, Provo, Utah 84602)

  • Taylor D. Nadauld

    (Mariott School, Brigham Young University, Provo, Utah 84602)

  • Philip E. Strahan

    (Carroll School of Management, Boston College, Chestnut Hill, Massachusetts 02467; National Bureau of Economic Research, Cambridge, Massachusetts 02138)

Abstract

Structured finance boomed during the run-up to the 2008 financial crisis. Highly rated, structured securities offered higher yield than other similarly rated bonds because of their concentration of systematic risk, but regulatory capital requirements did not account for this risk. As a result, regulated entities facing capital constraints had an incentive to invest in them. We show that life insurance companies exposed to unrealized losses from low interest rates in the early 2000s increased their holdings of highly rated securitized assets, consistent with regulatory arbitrage distorting the demand to hold these assets.

Suggested Citation

  • Craig B. Merrill & Taylor D. Nadauld & Philip E. Strahan, 2019. "Final Demand for Structured Finance Securities," Management Science, INFORMS, vol. 65(1), pages 390-412, January.
    • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:1:p:390-412
    DOI: 10.1287/mnsc.2017.2827
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    2. Gunter Löffler, 2020. "The Systemic Risk Implications of Using Credit Ratings Versus Quantitative Measures to Limit Bond Portfolio Risk," Journal of Financial Services Research, Springer;Western Finance Association, vol. 58(1), pages 39-57, August.
    3. Korgaonkar, Sanket, 2023. "The agency costs of tranching: Evidence from RMBS," Journal of Financial Intermediation, Elsevier, vol. 54(C).
    4. Josephson, Jens & Shapiro, Joel, 2020. "Credit ratings and structured finance," Journal of Financial Intermediation, Elsevier, vol. 41(C).
    5. Clark, Brian & Ebrahim, Alireza, 2022. "Risk shifting and regulatory arbitrage: Evidence from operational risk," Journal of Financial Stability, Elsevier, vol. 58(C).
    6. Wang, Hao & Xu, Ning & Yin, Haiyan & Ji, Hao, 2022. "The dynamic impact of monetary policy on financial stability in China after crises," Pacific-Basin Finance Journal, Elsevier, vol. 75(C).

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